A tip for commodity bottom fishing

Tuesday, September 02, 2008
Waiting for an ideal time to snap up commodity stocks now that they've fallen out of favour? It might pay to look at the trading behaviour of the iShares Lehman U.S. Treasury Inflation Protected Securities fund for clues of a market bottom for commodities.

The exchange traded fund tracks TIPS, which are government bonds whose coupons rise and fall with the consumer price index, thereby protecting investors from inflation. According to Bespoke Investment Group, the TIPS ETF and the Reuters/Jefferies CRB commodities index have a reasonable level of correlation, since rising commodity prices have been the No. 1 cause of inflation.

On Tuesday, the relationship was clear: The CRB index was down 3.6 per cent in the early afternoon and the TIPS ETF was down more than 1 per cent. But here's the useful part for investors: The ETF tends to move ahead of commodities. The ETF topped out in March, but the CRB index didn't hit a peak until about four months later.

“Both are currently declining, which means inflation concerns are subsiding,” Bespoke said on its blog, Think B.I.G. “Based on recent trading patterns in the two, it may be worthwhile to look for a bottom in TIP before looking for a rally in commodities.”

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